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budgeting

It’s really amazing that another year-end is upon us. Living just keeps happening and time flies.

Before you know it, we might be at a stage where we’ll need a little financial cushion to help us along. Hopefully over the years, you’ve been socking away a little savings regularly and that it has grown nicely and steadily for you.

Here again is a reminder to help you along in maximizing your savings and minimizing your taxes along the way.

Registered Retirement Savings Plan (RRSP) – building a tax deferred retirement nest egg, saving you taxes today and hopefully to pay tax in the future when you income is taxed at a lower rate.

Regular withdrawal to invest – getting into the habit of forced savings by withdrawing a set amount each payday. Investing those savings into tax efficient investments will help maximize your savings. The compounding effect of regular savings can also have a pleasant surprise over time.

Spend less. Think twice before buying will often result in a bigger nest egg. Remember, this is often from after tax money so your saving has even more bang for the buck.

It’s often said that having family and friends is the most important things to have during the holidays. This is so true, and you don’t need to spend a huge sum to have a memorable and wonderful time.

The rule of thumb that you only need 70% of your pre-retirement income is too simplistic. For some people, it is sufficient. But for many, it is not.

A good start in determining how much you’ll need in retirement is to break down your budget into two categories of spending –

necessities (basic food, shelter, clothing, medication, etc.), and

discretionary (travel, dining out, entertainment, money for a new car every years, etc.)

If your basic needs add up to 50% of your after-tax income, you will have up to another 50% for discretionary spending. So if you choose to spend only 25% on discretionary items, then you will need a total of 75% of your current income in retirement.

And remember to take into account in your calculation that certain expenses will decline or even disappear in retirement. For example, you will no longer have to make CPP or EI contributions, income tax will likely decrease, and the need to buy work clothes will be a thing of the past.

On the other hand, certain costs will likely increase in retirement. Healthcare and hobby related expenses will likely go up. So include these items in your retirement budget.

The last bit of planning is to make sure you will have enough income to take care of your retirement needs when you retire, before you retire.

I came across a recent ad with ex-dragon Arlene Dickinson espousing her goal-oriented strategy for saving money and restoring financial well-being. Immediately, the book The Millionaire Next Door came to my mind. This New York Times bestseller was published a number of years ago sharing with readers the surprisingly simple, yet effective secrets to amassing a million dollars or more. Those strategies then still apply today, as they did for many generations before us.

Both messages are literally the same. Slow and steady win the day when it comes to responsible saving and budgeting.

For example, you can save as little as $2.75 a day; and that can add up to $1,000 a year. Think 20 years into the future, that’s $20,000 from just saving the price of a cup of coffee at Starbucks today! This doesn’t even take into account the compounding effect of investing, which can potentially double (*) this total!

So by giving up a coffee at your favourite Tim Horton’s, walking or taking public transit instead of driving to your local store, and packing your lunch instead of fast food out, they can all add up.

There are many ideas to save. Just google budgeting, saving tips, etc. and you will be bombarded with thousands of useful websites and ideas. My book ‘The Personal Budgeting Kit‘ also has many smart saving ideas to help you on your way.

Here are some other strategies to keep in mind. They are simple, basic and logical.

My yesterday’s blog shows that you can amass $42,600 in tax free savings with only a 4% return and in just 7 years.

The difficult part for most of us is coming up with the money to contribute to our TFSA (tax free savings account). For 2015, the yearly maximum is $5,500 or about $15 a day.

$5,500 is a lot of money for most people. But $15 is more attainable. So focus on what you can save each day, instead of the huge end sum of $5,500. If you can’t possibly save $15, try $10 or even $5 a day. Any amount will work and get you started.

Put real cash saved each day into a glass jar so you can actually see it before depositing the money into your TFSA account at the end of the month. Start all over for each month. I’m certain you’ll be surprised how your TFSA will build over time.

Save $15 a day = $5,475 yearly!

Save $10 a day = $3,650 yearly!

Even just save $5 a day = $1,825 yearly!

Now isn’t this worth pursuing? And what a great way to start a January.

Sylvia Lim

Sylvia Lim is the author of Finances After 55, and Personal Budgeting Kit. Sylvia is a Certified Financial Planner (CFP) and Chartered Professional Accountant (CPA, CGA) with over 25 years of experience providing clients with sound financial advice and services.